<PAGE>
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12332
PROTECTIVE LIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2492236
(State of incorporation) (IRS Employer Identification Number)
2801 Highway 280 South
Birmingham, Alabama 35223
(Address of principal executive offices)
(205) 879-9230
(Registrant's telephone number)
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $.50 par value, outstanding as of August 2,
1996: 30,803,052 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
Part I..Financial Information:
Item 1. Financial Statements:
Report of Independent Accountants
Consolidated Condensed Statements of Income for the Three and Six
Months ended June 30, 1996 and 1995 (unaudited)
Consolidated Condensed Balance Sheets as of June 30, 1996
(unaudited) and December 31, 1995
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 1996 and 1995 (unaudited)
Notes to Consolidated Condensed Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Protective Life Corporation
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Corporation and subsidiaries as of June 30, 1996, and the
related consolidated condensed statements of income for the three-month and
six-month periods ended June 30, 1996 and 1995 and consolidated condensed
statements of cash flows for the six-month periods ended June 30, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
12, 1996, we expressed an unqualified opinion which contains an explanatory
paragraph regarding the changes in accounting for stock-based compensation plans
in 1995 and certain investments in debt and equity securities in 1993 on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated condensed balance sheet as of December 31, 1995,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
July 24, 1996
2
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premium and policy fees (net of reinsurance ceded:
three months: 1996 - $88,232; 1995 - $80,312;
six months: 1996 - $166,535; 1995 - $142,444) $124,135 $107,452 $232,801 $209,466
Net investment income 130,560 118,046 254,840 230,709
Realized investment gains (losses) 600 (555) 5,021 2,064
Other income 13,088 8,938 25,466 13,471
-------- --------- --------- --------
268,383 233,881 518,128 455,710
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1996 - $61,030; 1995 - $62,213;
six months: 1996 - $117,781; 1995 - $105,122) 159,532 138,754 308,761 274,147
Amortization of deferred policy acquisition costs 29,522 25,233 51,340 45,566
Other operating expenses (net of reinsurance ceded:
three months: 1996 - $25,007; 1995 - $24,204;
six months: 1996 - $42,809; 1995 - $35,473) 42,806 42,024 88,364 78,555
----------- ----------- --------- ---------
231,860 206,011 448,465 398,268
---------- ---------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 36,523 27,870 69,663 57,442
Income tax expense 12,418 9,197 23,685 18,956
----------- ----------- --------- --------
INCOME BEFORE MINORITY INTEREST 24,105 18,673 45,978 38,486
Minority interest in net income
of consolidated subsidiaries 805 805 1,609 1,609
---------- ----------- --------- --------
NET INCOME $ 23,300 $ 17,868 $ 44,369 $ 36,877
========== ========== ======== ========
NET INCOME PER SHARE $ 0.78 $ 0.62 $ 1.51 $ 1.31
=========== =========== ========= ==========
DIVIDENDS PAID PER SHARE $ 0.18 $ 0.16 $ 0.34 $ 0.30
=========== =========== ========= ==========
Average shares outstanding 29,805,228 28,766,664 29,412,794 28,186,516
See notes to consolidated condensed financial statements
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
JUNE 30 DECEMBER 31
1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $4,462,054 $3,892,008
Equity securities 45,668 38,711
Mortgage loans on real estate 1,463,070 1,834,357
Investment real estate, net 19,148 20,921
Policy loans 165,471 143,372
Other long-term investments 21,626 42,096
Short-term investments 97,969 53,591
------------ -----------
Total investments 6,275,006 6,025,056
Cash 18,907 11,392
Accrued investment income 67,464 61,007
Accounts and premiums receivable, net 55,795 38,722
Reinsurance receivables 322,683 271,018
Deferred policy acquisition costs 471,771 410,396
Property and equipment, net 35,838 36,578
Other assets 62,563 52,184
Assets held in separate accounts 443,406 324,904
----------- -----------
TOTAL ASSETS $7,753,433 $7,231,257
========== ==========
LIABILITIES
Policy liabilities and accruals $2,524,740 $2,124,486
Guaranteed investment contract deposits 2,459,727 2,451,693
Annuity deposits 1,253,784 1,280,069
Other policyholders' funds 142,690 134,380
Other liabilities 170,542 152,042
Accrued income taxes 2,222 (2,894)
Deferred income taxes 13,182 69,520
Debt 138,500 115,500
Liabilities related to separate accounts 443,406 324,904
Minority interest in consolidated subsidiaries 55,000 55,000
------------ -----------
TOTAL LIABILITIES 7,203,793 6,704,700
----------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE C
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value
Shares authorized: 3,600,000; Issued: none
Junior Participating Cumulative Preferred Stock, $1 par value
Shares authorized: 400,000; Issued: none
Common Stock, $0.50 par value
Shares authorized: 80,000,000
Issued: 1996 - 33,336,462; 1995 - 31,336,462 16,668 15,668
Additional paid-in capital 166,689 96,371
Net unrealized gains (losses) on investments
(net of income tax: 1996 - $(13,679); 1995 - $31,157) (25,404) 57,863
Retained earnings 408,492 373,922
Treasury stock (1996 - 2,534,091 shares; 1995 - 2,561,344 shares) (11,880) (12,008)
Unallocated stock in Employee Stock Ownership Plan
(1996 - 774,058 shares; 1995 - 793,804 shares) (4,925) (5,259)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 549,640 526,557
----------- -----------
$7,753,433 $7,231,257
See notes to consolidated condensed financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 44,369 $ 36,877
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 51,340 45,567
Capitalization of deferred policy acquisition costs (47,816) (39,292)
Depreciation expense 3,265 2,811
Deferred income taxes (11,502) (4,903)
Accrued income taxes 5,116 (1,339)
Interest credited to universal life and investment products 135,915 140,650
Policy fees assessed on universal life and investment products (53,936) (48,472)
Change in accrued investment income and other receivables (69,529) (33,347)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 109,484 72,907
Change in other liabilities 17,886 (36,258)
Other (net) (11,986) 617
----------- ------------
Net cash provided by operating activities 172,606 135,818
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 394,592 110,715
Other 35,649 36,281
Sale of investments
Investments available for sale 559,300 715,811
Other 560,840 3,062
Cost of investments acquired
Investments available for sale (1,671,234) (1,057,739)
Other (244,164) (129,153)
Acquisitions and bulk reinsurance assumptions 172,726 (7,550)
Purchase of property and equipment (2,859) (4,373)
Sale of property and equipment 334 104
------------- -------------
Net cash used in investing activities (194,816) (332,842)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 731,734 728,300
Principal payments on line of credit arrangements and debt (708,734) (704,300)
Issuance of Common Stock 70,538
Purchase of treasury stock (3)
Dividends to stockholders (9,799) (8,465)
Investment product deposits and changes in universal life deposits 425,110 447,884
Investment product withdrawals (479,124) (270,860)
----------- -----------
Net cash provided by financing activities 29,725 192,556
------------ -----------
INCREASE (DECREASE) IN CASH 7,515 (4,468)
CASH AT BEGINNING OF PERIOD 11,392 4,468
------------ ------------
CASH AT END OF PERIOD $ 18,907 $ 0
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on debt $ (5,291) $ (5,131)
Income taxes $ (28,896) $ (24,499)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 669 $ 350
Unallocated stock in ESOP $ 334 $ 333
Reissuance of treasury stock $ 231 $ 362
Acquisitions
Assets acquired $ 204,435 $ 10,394
Liabilities assumed (253,480) (25,651)
Reissuance of treasury stock (30,681)
---------------------------
Net $ (49,045) $ (45,938)
============================
See notes to consolidated condensed financial statements
</TABLE>
5
<PAGE>
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
of Protective Life Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. The year-end
consolidated condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1995.
NOTE B - SALE OF MORTGAGE LOANS
On March 22, 1996, the Company sold $554 million of its commercial
mortgage loans in a securitization transaction. Proceeds from the sale consisted
of cash of $400 million, net of expenses, and subordinated mortgaged-backed
securities of $161 million. The transaction resulted in a realized investment
gain of approximately $6.1 million. The cash proceeds were reinvested in fixed
maturity and short-term investments.
NOTE C - ISSUANCE OF COMMON STOCK
On May 30, 1996, the Company issued 2 million shares of its common
stock in a public offering at an issue price of $37.25 per share. Proceeds from
the issuance, net of underwriting fees and other expenses, amounted to
approximately $70.5 million.
NOTE D - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is contingently liable to obtain a $20 million letter of
credit under indemnity agreements with its directors. These agreements provide
insurance protection in excess of the directors' and officers' liability
insurance in force at the time up to $20 million. Should certain events occur
constituting a change in control of the Company, the Company must obtain the
letter of credit upon which directors may draw for defense or settlement of any
claim relating to performance of their duties as directors. Although the Company
has indemnification agreements with certain of its officers providing up to $10
million in indemnification, the officers' agreements do not require the Company
to obtain a letter of credit.
Under insurance guaranty fund laws in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent
6
<PAGE>
companies. The Company does not believe any assessments will be materially
different from amounts already provided for in the financial statements. Most of
these laws do provide, however, that an assessment may be excused or deferred if
it would threaten an insurer's own financial strength.
The Company and its subsidiaries, like other life and health insurers,
from time to time are involved in lawsuits, in which the plaintiff may seek
punitive damage awards in addition to compensatory damage awards. To date, no
such lawsuit has resulted in the award of any material amount of damages against
the Company. Although the outcome of any litigation cannot be predicted with
certainty, the Company believes that no pending or threatened litigation is
reasonably likely to have a material adverse effect on the financial position of
the Company.
7
<PAGE>
NOTE E - BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health
insurance industry. The following table sets forth total revenues, income (loss)
before income tax and minority interest, and identifiable assets of the
Company's business segments.
<TABLE>
SIX MONTHS ENDED JUNE 30
1996 1995
---- ----
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
<S> <C> <C> <C> <C>
TOTAL REVENUES:
Acquisitions $105,803 20.4% $ 96,169 21.1%
Financial Institutions 47,090 9.1 43,258 9.5
Group 103,609 20.0 88,002 19.3
Guaranteed Investment
Contracts 103,989 20.1 99,372 21.8
Individual Life 88,912 17.2 70,834 15.5
Investment Products 58,458 11.3 53,845 11.8
Corporate and Other 8,456 1.6 6,227 1.4
Unallocated Realized
Investment Gains (Losses) 1,811 0.3 (1,997) (0.4)
-------- ------ -------- ------
$518,128 100.0% $455,710 100.0%
======== ===== ======== =====
INCOME (LOSS) BEFORE INCOME
TAX AND MINORITY INTEREST:
Acquisitions $ 25,626 36.8% $ 22,991 40.0%
Financial Institutions 3,852 5.5 3,975 6.9
Group 6,700 9.6 5,029 8.8
Guaranteed Investment
Contracts 15,093 21.7 14,951 26.0
Individual Life 7,049 10.1 8,145 14.2
Investment Products 7,938 11.4 4,806 8.4
Corporate and Other 1,594 2.3 (458) (0.8)
Unallocated Realized
Investment Gains (Losses) 1,811 2.6 (1,997) (3.5)
--------- ------ -------- ------
$ 69,663 100.0% $ 57,442 100.0%
======== ===== ======== =====
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(dollars in thousands)
IDENTIFIABLE ASSETS:
Acquisitions $1,446,190 18.7% $1,255,542 17.4%
Financial Institutions 368,573 4.8 268,782 3.7
Group 283,699 3.7 278,094 3.8
Guaranteed Investment
Contracts 2,559,781 33.0 2,537,045 35.1
Individual Life 956,211 12.3 890,198 12.3
Investment Products 1,651,925 21.3 1,580,519 21.9
Corporate and Other 487,054 6.2 421,077 5.8
----------- ------ ---------- ------
$7,753,433 100.0% $7,231,257 100.0%
========== ===== ========== =====
</TABLE>
8
<PAGE>
NOTE F - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. At June 30, 1996 and for the six months then ended, the Company's
life insurance subsidiaries had stockholder's equity and net income prepared in
conformity with statutory reporting practices of $386.9 million and $43.6
million, respectively.
NOTE G - RECENTLY ADOPTED ACCOUNTING STANDARDS
At December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." As prescribed by SFAS No. 115, certain investments
are recorded at their market values with the resulting unrealized gains and
losses reduced by a related adjustment to deferred policy acquisition costs, net
of income tax, reported as a component of stockholders' equity. The market
values of fixed maturities increase or decrease as interest rates fall or rise.
Therefore, although the adoption of SFAS No. 115 does not affect the Company's
operations, its reported stockholders' equity will fluctuate significantly as
interest rates change.
The Company's balance sheets at June 30, 1996 and December 31, 1995,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(IN THOUSANDS)
Total investments $6,318,183 $5,919,787
Deferred policy acquisition costs 467,677 426,645
All other assets 1,006,656 795,805
---------- -----------
$7,792,516 $7,142,237
========== ==========
Deferred income taxes $ 26,861 $ 38,364
All other liabilities 7,190,611 6,635,179
---------- ----------
7,217,472 6,673,543
Stockholders' equity 575,044 468,694
----------- -----------
$7,792,516 $7,142,237
========== ==========
At January 1, 1996, the Company adopted SFAS No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Contracts"; SFAS No. 121,"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"; and SFAS No.
122, "Accounting for Mortgage Servicing Rights." The adoption of these
accounting standards did not have a material effect on the Company's financial
statements.
9
<PAGE>
NOTE H - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets or stockholders' equity.
NOTE I - SUBSEQUENT EVENT
On August 6, 1996, the Company issued $10 million of 7.45% Medium-Term
Notes due August 1, 2011. Net proceeds of $9.7 million were used to repay bank
borrowings.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Protective Life Corporation through its subsidiaries provides financial
services through the production, distribution, and administration of insurance
and investment products. Founded in 1907, Protective Life Insurance Company
("Protective Life") is the Company's principal operating subsidiary.
Unless the context otherwise requires, the "Company" refers to the
consolidated group of Protective Life Corporation and its subsidiaries.
The Company has six operating divisions: Acquisitions, Financial
Institutions, Group, Guaranteed Investment Contracts, Individual Life, and
Investment Products. The Company also has an additional business segment which
is described herein as Corporate and Other.
RESULTS OF OPERATIONS
Premiums and Policy Fees
The following table sets forth for the periods shown the amount of
premiums and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
SIX MONTHS PERCENTAGE
ENDED AMOUNT INCREASE/
JUNE 30 (IN THOUSANDS) (DECREASE)
---------- -------------- ----------
1995 $209,466 11.7%
1996 232,801 11.1
Premiums and policy fees increased $23.3 million or 11.1% in the first
six months of 1996 over the first six months of 1995. Increases in premiums and
policy fees from the Group, Individual Life and Investment Product Divisions
were $7.8 million, $8.8 million and $2.0 million, respectively. Premium and
policy fees from the Financial Institutions Division increased $0.8 million the
first six months of 1996 as compared to the first six months of 1995. This
resulted from the reinsurance of a block of policies in the second quarter of
1996 representing an $18.2 million increase in premiums and policy fees. This
increase was largely offset by decreases resulting from a reinsurance
arrangement begun in 1995, whereby all of the Division's new credit insurance
sales are ceded to a reinsurer. The coinsurance of a block of policies in the
first quarter of 1996 resulted in a $8.9 million increase in premiums and policy
fees. Decreases in older acquired blocks resulted in a $5.2 million decrease in
premiums and policy fees.
11
<PAGE>
Net Investment Income
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
SIX MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
---------- -------------- ----------
1995 $230,709 16.0%
1996 254,840 10.5
Net investment income in the first six months of 1996 was $24.1 million
or 10.5% higher than the corresponding period of the preceding year primarily
due to increases in the average amount of invested assets. Invested assets have
increased primarily due to receiving annuity and guaranteed investment contract
("GIC") deposits and to acquisitions. The assumption of a block of policies in
the first quarter of 1996 and a block of policies in the second quarter of 1996
resulted in an increase in net investment income of $9.0 million in the first
six months of 1996 as compared to the same period in 1995.
Realized Investment Gains
The Company generally purchases its investments with the intent to hold
to maturity by purchasing investments that match future cash-flow needs.
However, the Company may sell any of its investments to maintain approximate
matching of assets and liabilities. Accordingly, the Company has classified its
fixed maturities and certain other securities as "available for sale." The sales
of investments that have occurred have resulted principally from portfolio
management decisions to maintain approximate matching of assets and liabilities.
The following table sets forth realized investment gains for the
periods shown:
SIX MONTHS REALIZED
ENDED INVESTMENT GAINS
JUNE 30 (IN THOUSANDS)
---------- ----------------
1995 $2,064
1996 5,021
Realized investment gains for the first six months of 1996 were $3.0
million higher than the corresponding period of 1995. In the 1996 first quarter,
the Company sold $554 million of its commercial mortgage loans in a
securitization transaction, resulting in a $6.1 million realized investment
gain.
12
<PAGE>
Other Income
The following table sets forth other income for the periods shown:
SIX MONTHS
ENDED OTHER INCOME
JUNE 30 (IN THOUSANDS)
---------- --------------
1995 $13,471
1996 25,466
Other income consists primarily of revenues of the Company's dental
managed care plans and broker-dealer subsidiary, fees from
administrative-services-only types of group accident and health insurance
contracts, and revenues of the Company's wholly-owned insurance marketing
organizations and other small noninsurance subsidiaries. Other income in the
first six months of 1996 was $12.0 million higher than the corresponding period
of 1995. On March 20, 1995, the Company completed its acquisition of National
Health Care Systems of Florida, Inc. ("NHCS" also known as "DentiCare"), based
in Jacksonville, Florida. The acquisition resulted in a $6.9 million increase in
other income in the first six months of 1996. Revenues from the Company's
broker-dealer subsidiary increased $2.2 million in the first six months of 1996
as compared to the same period in 1995. Other income from all other sources
increased $2.9 million in the first six months of 1996 as compared with the
first six months of 1995.
Income Before Income Tax and Minority Interest
The following table sets forth income or loss before income tax and
minority interest by business segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX
AND MINORITY INTEREST
SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
BUSINESS SEGMENT 1995 1996
---------------- ---- ----
Acquisitions $22,991 $25,626
Financial Institutions 3,975 3,852
Group 5,029 6,700
Guaranteed Investment Contracts 14,951 15,093
Individual Life 8,145 7,049
Investment Products 4,806 7,938
Corporate and Other (458) 1,594
Unallocated Realized Investment Gains (Losses) (1,997) 1,811
------- --------
$57,442 $69,663
======= =======
Percentage Increase 17.6% 21.3%
13
<PAGE>
Pretax earnings from the Acquisitions Division increased $2.6 million
in the first six months of 1996 as compared to the same period of 1995. Earnings
from the Acquisitions Division are normally expected to decline over time (due
to the lapsing of policies resulting from deaths of insureds or terminations of
coverage) unless new acquisitions are made. The Division's two most recent
acquisitions represented a $2.9 million increase. Older acquired blocks
represented a $0.3 million decrease in the first six months of 1996 as compared
to the same period in 1995.
Pretax earnings of the Financial Institutions Division were $0.1
million lower in the first six months of 1996 as compared to the same period in
1995. The reinsurance arrangement begun in the first quarter of 1995 to reinsure
all of the Division's new credit insurance sales and thereby improve the
Division's return on investment, reduced the Division's reported earnings by
approximately $1.9 million, which was contemplated when the arrangement was
entered into. This decrease was partially offset by the coinsurance of a block
of policies in the second quarter of 1996 which resulted in a $1.0 million
increase in earnings.
Group pretax earnings were $1.7 million higher in the first six months
of 1996 as compared to the first six months of 1995. Dental earnings improved
$3.1 million which was partially offset by a decline in traditional group health
earnings.
The Guaranteed Investment Contract ("GIC") Division had pretax
operating earnings of $19.4 million in the first six months of 1996 and $14.7
million in the corresponding period of 1995. This increase was due to improved
operating spreads and to the growth in GIC deposits placed with the Company. At
June 30, 1996, GIC deposits totaled $2.5 billion compared to $2.4 billion one
year earlier. Realized investment losses associated with this Division in the
first six months of 1996 were $4.4 million as compared to realized investment
gains of $0.3 million in the same period last year. As a result, total pretax
earnings were $15.1 million in the first six months of 1996 compared to $15.0
million for the same period last year.
The Individual Life Division had pretax operating earnings of $5.9
million in the first six months of 1996 as compared to $8.1 million in the same
period of 1995. The decrease was primarily due to higher expenses and to
approximately $0.7 million higher life insurance claims in the first six months
of 1996 as compared to the same period last year. Realized investment gains, net
of related amortization of deferred policy acquisition costs, associated with
this Division were $1.1 million in 1996. As a result, total pretax earnings were
$7.0 million in the first six months of 1996 which was $1.1 million lower than
the first six months of 1995 in which there were no realized investment gains.
Investment Products Division pretax operating earnings were $5.8
million which was $3.4 million higher in the first six months of 1996 compared
to the same period of 1995. Earnings increased due to growth in variable annuity
deposits and due to lower expenses. Realized investment gains associated with
the Division, net of related amortization of deferred policy acquisition costs,
were $2.1 million as compared to $2.4 million last year, resulting in total
pretax earnings of $7.9 million in the first six months of 1996 as compared to
$4.8 million in the same period of 1995.
The Corporate and Other segment consists primarily of net investment
income on capital, interest expense on substantially all debt, the Company's 50%
owned joint venture in Hong Kong, several small insurance lines of business, and
the operations of several small noninsurance subsidi aries. Pretax earnings for
this segment increased $2.1 million in the first six months of 1996 as compared
to the first six months of 1995 due to improved operating results from the
Company's joint venture in Hong Kong and increased net investment income on
capital.
Income Taxes
The following table sets forth the effective income tax rates for the
periods shown:
SIX MONTHS
ENDED ESTIMATED EFFECTIVE
JUNE 30 INCOME TAX RATES
---------- -------------------
1995 33%
1996 34
The effective income tax rate for the full year of 1995 was 34%.
Management's estimate of the effective income tax rate for 1996 is also 34%.
Net Income
The following table sets forth net income and the net income per share
for the periods shown:
SIX MONTHS NET INCOME
ENDED TOTAL PERCENTAGE
JUNE 30 (IN THOUSANDS) PER SHARE INCREASE
---------- -------------- --------- ----------
1995 $36,877 $1.31 8.3%
1996 44,369 1.51 15.3
Compared to the same period in 1995, net income per share in the first
six months of 1996 increased 15.3%, reflecting improved operating earnings in
the Acquisitions, Group, Guaranteed Investment Contracts, and Investment
Products Divisions, and the Corporate and Other segment, and higher realized
investment gains (net of related amortization of deferred policy acquisition
costs), which were partially offset by lower operating earnings in the Financial
Institutions and Individual Life Divisions.
Recently Issued Accounting Standards
In June 1996 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The Company
anticipates that the impact of adopting this accounting standard will be
immaterial to its financial condition.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations usually produce a positive cash flow. This
cash flow is used to fund an investment portfolio to finance future benefit
payments. Since future benefit payments largely represent medium- and long-term
obligations reserved using certain assumed interest rates, the Company's
investments are predominantly in medium- and long-term, fixed-rate investments
such as bonds and mortgage loans.
Many of the Company's products contain surrender charges and other
features that reward persistency and penalize the early withdrawal of funds.
Surrender charges for these products generally are sufficient to cover the
Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered. GICs and certain annuity contracts have market-value
adjustments that protect the Company against investment losses if interest rates
are higher at the time of surrender as compared to interest rates at the time of
issue.
In accordance with Statement of Financial Accounting Standards No. 115,
the Company's investments in debt and equity securities are reported at market
value, and investments in mortgage loans are reported at amortized cost. At June
30, 1996, the fixed maturity investments (bonds, bank loan participations, and
redeemable preferred stocks) had a market value of $4,462.1 million, which is
1.1% below amortized cost (less allowances for uncollectible amounts on
investments) of $4,513.2 million. The Company had $1,463.1 million in mortgage
loans at June 30, 1996. While the Company's mortgage loans do not have quoted
market values, at June 30, 1996, the Company estimates the market value of its
mortgage loans to be $1,545.0 million (using discounted cash flows from the next
call date) which is 5.6% in excess of amortized book value. Most of the
Company's mortgage loans have significant prepayment penalties. These assets are
invested for terms approximately corresponding to anticipated future benefit
payments. Thus, market value fluctuations should not adversely affect liquidity.
For several years the Company has offered a commercial loan product
under which the Company will permit a slightly higher loan-to-value ratio in
exchange for a participating interest in the cash flows from the underlying real
estate. Approximately $462 million of the Company's mortgage loans have this
participation feature.
At June 30, 1996, delinquent mortgage loans and foreclosed real estate
were 0.4% of assets. Bonds rated less than investment grade were 1.7% of assets.
Additionally, the Company had bank loan participations that were less than
investment grade representing 2.2% of assets. The Company does not expect these
investments to adversely affect its liquidity or ability to hold its other
investments to maturity. The Company's allowance for uncollectible amounts on
investments was $31.6 million at June 30, 1996.
Policy loans at June 30, 1996 were $165.5 million, a decrease of $0.2
million from December 31, 1995 (after excluding the $22.3 million of policy
loans associated with the coinsurance of a block of policies in the first
quarter of 1996). Policy loan rates are generally in the 4.5% to 8.0% range and
at least equal the assumed interest rates used for future policy benefits.
15
<PAGE>
The Company believes its asset/liability matching practices and certain
product features provide significant protection for the Company against the
effects of changes in interest rates. However, approximately one-fourth of the
Company's liabilities relate to products (primarily whole life insurance) the
profitability of which may be affected by changes in interest rates. The effect
of such changes in any one year is not expected to be material. Additionally,
the Company believes its asset/liability matching practices provide sufficient
liquidity to enable it to fulfill its obligation to pay benefits under its
various insurance and deposit contracts.
The Company's asset/liability matching practices involve the monitoring
of asset and liability durations for various product lines; cash flow testing
under various interest rate scenarios; and the continuous rebalancing of assets
and liabilities with respect to yield, risk, and cash flow characteristics. It
is the Company's policy to maintain asset and liability durations within 10% of
one another, although from time to time broader duration matching is allowed.
The Company does not use derivative financial instruments for trading
purposes. Combinations of futures contracts and options on treasury notes are
sometimes used as hedges for asset/liability management of certain investments,
primarily mortgage loans on real estate, and liabilities arising from
interest-sensitive products such as GICs and annuities. Realized investment
gains and losses of such contracts are deferred and amortized over the life of
the hedged asset. The Company uses interest rate swap contracts to convert
certain investments from a variable to a fixed rate of interest and from a fixed
to a variable rate of interest, and to convert its Senior Notes and Monthly
Income Preferred Securities from a fixed rate to a variable rate of interest. At
June 30, 1996, related open interest rate swap contracts with a notional amount
of $180.3 million were in a $0.3 million net unrealized loss position.
Withdrawals related to GIC contracts were approximately $800 million
during 1995. Withdrawals related to GIC contracts are estimated to be
approximately $700 million in 1996. The Company's asset/liability matching
practices take into account maturing contracts. Accordingly, the Company does
not expect maturing contracts to have an unusual effect on the future operations
and liquidity of the Company.
On March 22, 1996, the Company sold approximately $554 million of its
commercial mortgage loans in a securitization transaction. Proceeds from the
sale consisted of cash of $400 million, net of expenses, and mortgaged-backed
securities of approximately $161 million. The transaction resulted in a realized
gain of approximately $6.1 million. The cash proceeds were reinvested in fixed
maturity and short-term investments.
In anticipation of receiving GIC and annuity deposits, the life
insurance subsidiaries were committed at June 30, 1996 to fund mortgage loans
and to purchase fixed maturity and other long-term investments in the amount of
$345.7 million. The Company's subsidiaries held $116.0 million in cash and
short-term investments at June 30, 1996. Protective Life Corporation had an
additional $0.9 million in cash and short-term investments available for general
corporate purposes.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then available.
Therefore, the Company has arranged sources of credit for its insurance
subsidiaries to
16
<PAGE>
use when needed. The Company expects that the rate received on its investments
will equal or exceed its borrowing rate. Additionally, the Company may from time
to time sell short-duration GICs to complement its cash management practices.
At June 30, 1996, Protective Life Corporation had borrowed $43.5
million of a $60.0 million revolving line of credit and an additional $20.0
million of short-term bank borrowings, collectively bearing interest rates
averaging 5.8%. The Company's bank borrowings have increased $23.0 million since
December 31, 1995. Proceeds were used for general corporate purposes, including
the acquisition of a small dental managed care organization, an additional
investment in the Hong Kong joint venture, and an investment in an
Internet-based insurance distribution system.
On August 6, 1996, the Company issued $10 million of 7.45% Medium-Term
Notes due August 1, 2011. The notes are not callable by the Company prior to
maturity. However, the notes are redeemable, at the option of the holder, in
limited amounts. Net proceeds of $9.7 million were used to repay bank
borrowings.
Protective Life Corporation's cash flow is dependent on cash dividends
and payments on surplus notes from its subsidiaries, revenues from investment,
data processing, legal, and management services rendered to the subsidiaries,
and investment income. At December 31, 1995, approximately $180 million of
consolidated stockholders' equity, excluding net unrealized losses on
investments, represented net assets of the Company's insurance subsidiaries that
cannot be transferred in the form of dividends, loans or advances to the parent
company. In addition, the states in which the Company's insurance subsidiaries
are domiciled impose certain restrictions on the insurance subsidiaries' ability
to pay dividends to Protective Life Corporation. Also, distributions, including
cash dividends to Protective Life Corporation from its life insurance
subsidiaries, in excess of approximately $322 million, would be subject to
federal income tax at rates then effective. The Company does not anticipate
involuntarily making distributions that would be subject to income tax.
Due to the expected growth of the Company's insurance sales, the
Company plans to retain substantial portions of the earnings of its life
insurance subsidiaries in those companies primarily to support their future
growth. Protective Life Corporation's cash disbursements have from time to time
exceeded its cash receipts, and these shortfalls have been funded through
various external financings. Therefore, Protective Life Corporation may from
time to time require additional external financing.
On May 30, 1996, the Company completed a public offering of 2 million
shares of its common stock. Net proceeds of approximately $70.5 million were
primarily invested in the Company's insurance company subsidiaries.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles and
are intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The achievement of long-term
growth will require growth in the statutory capital of the Company's insurance
subsidiaries. The subsidiaries may secure additional statutory capital through
various sources, such as internally generated statutory earnings or equity
contributions by the Company.
17
<PAGE>
The NAIC's risk-based capital requirements require insurance companies
to calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formula includes components for asset
risk, liability risk, interest rate exposure and other factors. Based upon the
June 30, 1996 statutory financial reports of the Company's insurance
subsidiaries, the Company's insurance subsidiaries are adequately capitalized
under the formula.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already reflected in the financial statements.
A substantial number of civil jury verdicts have been returned against
life and health insurers in the jurisdictions in which the Company does business
involving the insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Some of the lawsuits have resulted
in the award of substantial judgments against the insurers, including material
amounts of punitive damages that are disproportionate to the actual damages. In
some states (including Alabama), juries have substantial discretion in awarding
punitive damages, which creates the potential for unpredictable material adverse
judgments in any given punitive damage suit. The Company and its subsidiaries,
like other life and health insurers, in the course of business are involved in
such litigation. In addition, in some class action and other lawsuits involving
insurers' sales practices, insurers have made material settlement payments.
Although the outcome of any litigation cannot be predicted with certainty, the
Company believes that at the present time there are no pending or threatened
lawsuits that are reasonably likely to have a material adverse effect on the
financial position of the Company.
The Company is not aware of any material pending or threatened
regulatory action with respect to the Company or any of its subsidiaries.
18
<PAGE>
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 15 - Letter re: unaudited interim financial statements
(b). Exhibit 27 - Financial data schedule
(c). A report on Form 8-K was filed April 24, 1996, concerning the
Company's 1996 first quarter earnings press release.
(d). A report on Form 8-K was filed May 23, 1996 containing Exhibits
related to the Registration Statements on Form S-3 (Registration
Nos. 33-55063 and 333-03435) of the Company and PLC Capital L.L.C.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
Date: August 12, 1996 /s/ Jerry W. DeFoor
----------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
20
<PAGE>
<PAGE>
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated July 24, 1996, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended June 30, 1996, and included in the Company's
quarterly report on Form 10-Q for the quarter then ended, is incorporated by
reference in the Company's registration statements on Form S-8 and Form S-3.
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statements prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
August 9, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life Corporation and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 4,462,054
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 45,668
<MORTGAGE> 1,463,070
<REAL-ESTATE> 19,148
<TOTAL-INVEST> 6,275,006
<CASH> 18,907
<RECOVER-REINSURE> 322,683
<DEFERRED-ACQUISITION> 471,771
<TOTAL-ASSETS> 7,753,433
<POLICY-LOSSES> 2,250,256
<UNEARNED-PREMIUMS> 274,484
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 142,690
<NOTES-PAYABLE> 138,500
0
0
<COMMON> 16,668<F1>
<OTHER-SE> 532,972
<TOTAL-LIABILITY-AND-EQUITY> 7,753,433
232,801
<INVESTMENT-INCOME> 254,840
<INVESTMENT-GAINS> 5,021
<OTHER-INCOME> 25,466
<BENEFITS> 308,761
<UNDERWRITING-AMORTIZATION> 51,340
<UNDERWRITING-OTHER> 88,364
<INCOME-PRETAX> 69,663
<INCOME-TAX> 23,685
<INCOME-CONTINUING> 44,369<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,369
<EPS-PRIMARY> 1.51<F1>
<EPS-DILUTED> 1.51<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Reflects two for one stock split effective June 1, 1995.
<F2>Net of minority interest in income of consolidated subsidiaries of $1,609.
</FN>
</TABLE>
